Where should you invest?
1. Commodities The key factors that determine the price of a commodity like gold for example (mine output for one) are different from factors that impact the value of other investments like shares and bonds. Investing in commodities therefore helps in diversifying the risk element in your portfolio. Not to suggest that they will surely do well but in inflationary times, but people do increase their allocations towards commodities. (Read more on gold)
Furthermore, gold can now be deposited with institutions like the State Bank of India. While this will earn you a very marginal interest, it will nevertheless take care of storage costs etc.
Investing in a commodity takes care of the risk arising due to erosion in value of the currency (since most currencies are priced in US Dollars).
2. Stocks
When it comes to beating inflation, few asset classes can better stocks. For example, over the last three years stocks have returned in excess of 15% p.a. (the BSE Sensex), beating inflation, which averaged about 5% - 6% p.a., by a very large margin. If one were to use a diversified mutual fund as a benchmark for stocks, the difference would have been even larger!
However, stocks carry significant risk, especially if one is attempting to build his/her own portfolio of stocks. For those who wish to minimise this risk, equity mutual funds are the best option.
For the more adventurous type, two sectors that are relatively immune to inflation are pharmaceuticals and software.
3. Inflation indexed bonds
Such bonds compensate you for the rise in inflation (or the decline in the purchasing power of the currency). Unfortunately in India such bonds are not on offer for us individuals (though the RBI has spoken about reintroducing them in today's policy). But with the RBI permitting Indians to invest abroad, one can always buy them in international markets.
4. Short term deposits and funds
These instruments will give you the required liquidity you need while ensuring that you do not lose out in case interest rates were to rise.
5. Property
Property is again a preferred avenue of investment as in such times prices tend to rise upwards in line with the increase in cost of construction. The only deterrent here is that the minimum amount you need to invest here is substantial and beyond the reach of most investors. An alternative can be real estate mutual funds, which are very popular in international markets.
1. Commodities The key factors that determine the price of a commodity like gold for example (mine output for one) are different from factors that impact the value of other investments like shares and bonds. Investing in commodities therefore helps in diversifying the risk element in your portfolio. Not to suggest that they will surely do well but in inflationary times, but people do increase their allocations towards commodities. (Read more on gold)
Furthermore, gold can now be deposited with institutions like the State Bank of India. While this will earn you a very marginal interest, it will nevertheless take care of storage costs etc.
Investing in a commodity takes care of the risk arising due to erosion in value of the currency (since most currencies are priced in US Dollars).
2. Stocks
When it comes to beating inflation, few asset classes can better stocks. For example, over the last three years stocks have returned in excess of 15% p.a. (the BSE Sensex), beating inflation, which averaged about 5% - 6% p.a., by a very large margin. If one were to use a diversified mutual fund as a benchmark for stocks, the difference would have been even larger!
However, stocks carry significant risk, especially if one is attempting to build his/her own portfolio of stocks. For those who wish to minimise this risk, equity mutual funds are the best option.
For the more adventurous type, two sectors that are relatively immune to inflation are pharmaceuticals and software.
3. Inflation indexed bonds
Such bonds compensate you for the rise in inflation (or the decline in the purchasing power of the currency). Unfortunately in India such bonds are not on offer for us individuals (though the RBI has spoken about reintroducing them in today's policy). But with the RBI permitting Indians to invest abroad, one can always buy them in international markets.
4. Short term deposits and funds
These instruments will give you the required liquidity you need while ensuring that you do not lose out in case interest rates were to rise.
5. Property
Property is again a preferred avenue of investment as in such times prices tend to rise upwards in line with the increase in cost of construction. The only deterrent here is that the minimum amount you need to invest here is substantial and beyond the reach of most investors. An alternative can be real estate mutual funds, which are very popular in international markets.
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